Appeal Watch: Bhasin v Hrynew Submissions Before the SCC

On February 12, 2014, the Supreme Court of Canada heard an appeal from the Alberta Court of Appeal’s decision in Bhasin v Hrynew, 2013 ABCA 98. My previous analysis of the ruling can be found here on The Court.

Lawyers for the plaintiff and the defendants made their oral submissions before Chief Justice McLachlin, along with Justices LeBel, Abella, Rothstein, Cromwell, Karakatsanis, and Wagner. A video webcast of the Supreme Court’s back-and-forth session with counsel can be found here.

Oral Submissions: Plaintiff/Appellant

Neil Finkelstein, counsel for the plaintiff Harish Bhasin, opened his submissions by setting out what – in his client’s view – was the principal issue in this case: whether a contracting party can arrogate to itself a right that it did not have in the contract. Specifically, whether in the context of the 1998 Enrollment Director Agreement (the “Agreement”) between Mr. Bhasin and Canadian American Financial Corporation (“CAFC”) and the relationship it creates, CAFC had a duty to terminate in good faith [para 57 of the Appellant’s Factum].

Justice Moen of the Court of Queen’s Bench of Alberta (“ABQB”), presiding over the trial in Bhasin v Hrynew, 2011 ABQB 637, found that the Agreement contained similar features to employment contracts and franchise agreements. At the Supreme Court level, Chief Justice McLachlin questioned whether this situation was similar to the employment cases of Wallace v United Grain Growers, [1997] 3 SCR 701, and Honda Canada v Keays, [2008] 2 SCR 362, while Justice Karakatsanis asked to what extent the Agreement is analogous to a franchise agreement.

Mr. Finkelstein attempted to distinguish the contract at bar from both contexts, since drawing those analogies may raise different issues and further complicate what his client was trying to achieve. He further pointed out that the Alberta Franchises Act, RSA 2000, c F-23, defines a “franchise” as where the franchisee pays a fee to the franchisor. Here, CAFC paid Mr. Bhasin a commission for the RESPs his agency sold. On this point, the plaintiff was in agreement with the defendants/respondents CAFC and Mr. Hrynew; the employment and franchise contexts do not apply to the impugned commercial contract [paras 77-78, 84 of the Respondents’ Factum].

Justices Wagner, Rothstein, and Chief Justice McLachlin then inquired about the distinction, if any, between a positive duty of good faith and a negative duty to abstain from bad faith conduct. Mr. Finkelstein conceded that there likely is no middle ground between the two reciprocals and that the distinction is largely a semantic one. However, Mr. Finkelstein differentiated between what his client was asking the court to do (i.e., interpret the Agreement, given the context of the parties’ relationship, to find that a duty of good faith was owed to Mr. Bhasin), and what he was not asking the court to do (i.e., find that an implied duty of good faith exists, despite not being expressly provided for within the four corners of the Agreement).

The legal approach of contractual interpretation is to look at what the parties intended, given the factual matrix; the legal test for implying a term is whether such an implied term is necessary to give business efficacy to the contract. Mr. Finkelstein appeared to be responding to the defendants’ written submission that in order to enforce an implied duty of good faith, the court must find that such an implied term is necessary to give business efficacy to the Agreement [paras 113-114 of the Respondents’ Factum].

Justice Rothstein later contended that the words “good faith” or “not acting in bad faith” are not found within the impugned Clause 3.3 of the Agreement. For Justice Rothstein, contractual terms are either express or implied, and thus what Mr. Bhasin was essentially asking the court to do was to imply a term – despite the Agreement’s entire agreement provision in Clause 11.2 that excluded implied terms from forming part of the contract. To this, Mr. Finkelstein responded in oral argument that “express” does not always mean “literal.” Moreover, the plaintiff’s written submissions maintain that:

[A]n entire agreement clause will not preclude the implication of … a duty of good faith … or the duty not to abuse a discretion, because such a term is already part of the existing agreement […] [T]he “implied” terms which s. 11.2 is intended to exclude are not the duty of good faith. Instead, the clause is directed towards excluding casual remarks made in the course of negotiations (i.e. “representations, warranties, terms, conditions or collateral agreements”) or obligations implied by statute. [paras 83-84 of the Appellant’s Factum]

Justice Abella also asked Mr. Finkelstein about reasonable expectations of the parties. He replied that the parties’ reasonable expectations include what their intentions were when they entered into the contract (i.e., to ensure the continued economic viability of both CAFC and Mr. Bhasin’s businesses; a goal undermined by a termination of the Agreement in bad faith). Chief Justice McLachlin subsequently suggested that when people take the trouble to put down their contract in writing, what is contained in that document is exactly what they intended; especially where the parties have agreed to a four corners clause, the parties do not intend for it to be modified by anything else.

Mr. Finkelstein replied that the defendants are arguing that there is an “absolute freedom” in the impugned Clause 3.3 to terminate the Agreement. However, that “absolute freedom” is not mentioned in Clause 3.3. As such, the defendants are also asking the judges to apply the general principle of contractual interpretation. On the other hand, the defendants’ written submissions argue at length that the clear and unambiguous language of Clause 3.3 represents the entirety of the parties’ reasonable expectations regarding contract renewal [para 89 of the Respondents’ Factum].

Mr. Finkelstein summarized the position of the plaintiff as follows: a party cannot exercise a discretionary power to terminate an agreement in order to achieve an extra-contractual goal (in this instance, to force a merger between Mr. Bhasin’s agency and Mr. Hrynew’s agency). Mr. Bhasin was not arguing that CAFC’s termination needed to be reasonable or required cause, but rather that it cannot be exercised for a bad faith reason.

Co-counsel for the plaintiff, Brandon Kain, made brief oral submissions as to the sufficiency of the plaintiff’s pleadings – which the defendants had successfully argued before the Alberta Court of Appeal were insufficient to ground the trial judge’s reasons. In the plaintiff’s view, the duty of good faith was a live issue at trial; witnesses were asked about it, and CAFC argued the issue in their final written submissions to Justice Moen. Alternatively, section 48 of the Supreme Court Act, RSC 1985, c S-26 gives the SCC jurisdiction to amend the pleadings as it sees fit to resolve the real issue in dispute.

Oral Submissions: Defendants/Respondents

Eli Lederman, counsel for the defendants CAFC and Larry Hrynew, began his oral submissions by arguing that consistent with the SCC’s majority judgement in Wallace, even in an employment context there is no requirement to terminate for a good faith reason – only to terminate in a good faith manner [paras 52-53, 95 of Respondents’ Factum].

In response to Justice Cromwell’s allegation that essentially what happened here was an expropriation of Mr. Bhasin’s business, Mr. Lederman maintained that Mr. Bhasin’s loss of the $87,000 value of his business was a natural result of the Agreement coming to an end. It is precisely what the parties understood and agreed could happen if the fixed-term 3-year contract was not renewed. Mr. Lederman also maintained that CAFC did not need to have a motive or reason to exercise its non-renewal right. He agreed with Justice Cromwell’s subsequent question that if the motive or reason for CAFC’s exercise of Clause 3.3 was proven to exist, such motive or reason would be irrelevant.

The Chief Justice asked Mr. Lederman to elaborate about the nature of contracts where one of the parties is utterly dependent on the exclusive ability of another party to carry on its commercial undertaking, outside of an employment or franchise context. Mr. Lederman replied that when a court looks to the reasonable intention of the parties, any imbalance in bargaining power between parties does not affect the contract’s interpretation, unless the contract was unconscionable at the time of formation [para 85 of Respondents’ Factum].

Justice Karakatsanis put forward the contention that if there is a general duty of fair dealing and good faith in a franchise agreement, it could also apply in a commercial context. Mr. Lederman disputed the importability of the broad principles of good faith and fair dealing from franchise law into commercial relationships, and reiterated that allowing courts to scrutinize whether a termination was for a legitimate business reason would open the floodgates for all disgruntled employees to bring claims every time they were dismissed [para 134 of Respondents’ Factum].

Perhaps the most pointed critique of the defendants’ position came from Justice Abella, when she alleged that the defendants were arguing for the commercial certainty in the right to freely undermine another party, versus the certainty of knowing that every commercial contract assumes no bad faith (as in Quebec under the Civil Code). For Justice Abella, the intention in every commercial contract is the always the parties’ commercial viability – so if one party behaves in a way that undermines the other party’s economic viability, this would contradict the objectives of the contract.

Mr. Lederman chose to answer Justice Abella’s critique by going into the exchanged correspondence between CAFC and Mr. Bhasin when they were discussing the potential merger between Mr. Bhasin’s agency and Mr. Hrynew’s agency, in order to demonstrate to the SCC bench that CAFC’s decision not to renew was not in bad faith but rather a mere business decision. However, paragraph 129 of the Respondents’ Factum provides a fairly succinct reply of its own:

The current and correct state of the law is that a party is not permitted to abuse a right to defeat the bargain struck between the parties. The objectives of the parties are often very different; the bargain struck between them is one and the same. [emphasis in original]

In Mr. Lederman’s view, the objective of Mr. Bhasin in signing the Agreement was to have the contract renewed perpetually until his retirement at age 65 (i.e., renewed three times, each for a period of three years, for nine years until his retirement) [para 133 of Respondents’ Factum]. CAFC did not share Mr. Bhasin’s objective, nor did CAFC intend for the contract to confer that right, as evidenced by the non-renewal clause in dispute [para 145 of Respondents’ Factum]. This point is repeated throughout both the defendants’ oral and written submissions.

However, at the very outset of the counsel for the plaintiff’s address to the Supreme Court, Mr. Finkelstein denounced the straw-man argument that opposing counsel was attempting to draw as the plaintiff’s position: that Mr. Bhasin believes Clause 3.3 can only be exercised for cause. Instead, Mr. Finkelstein emphasized that Clause 3.3, properly interpreted, cannot be exercised in bad faith. As I mentioned in my previous discussion about Bhasin v Hrynewhere on The Court, Justice Moen addressed this point at paragraphs 256-257 of her trial judgement:

CAFC certainly was not obligated under the 1998 Agreement to continue the contractual relationship forever. However, CAFC was obligated under the 1998 Agreement to exercise the non-renewal clause in a way that respected Bhasin’s interests to a standard of good faith – this means honestly, reasonably and fairly.

Whether this remains a sticking point for the Supreme Court of Canada is yet to be seen, as lawyers across the country eagerly await the SCC’s decision.